Default Is the Enemy of the Social Welfare State

We were viciously criticized as naïve in April for heralding “The Death of the American Social Welfare State“. Yet the failure this weekend of the supposedly $4 trillion deficit reduction “grand compromise”; with President Obama offering to cut $100 billion dollars in Social Security payouts over 10 years in exchange for Republican agreeing to raise taxes by $200 billion a year; essentially means a default on all the federal government discretionary spending Social Welfarists live for. The Federal government’s spendable tax revenue of approximately $170 billion per month; is roughly just enough to cover legally required Social Security / Medicare payments ($90 billion) and debt service (ranging from $10-40 billon per month) – and the most politically sensitive payments for military and unemployment ($40 billion).

The Privateer Newsletter presents some interesting factoids about how America got to this point:

• Not one penny of U.S. debt has been repaid for 51 years: the last time US government funded debt actually decreased on a year-over-year basis was 1960;

• 97% of today’s funded debt has been accumulated since August 1971 – the end of the Bretton Woods agreements when President Nixon took America off the gold standard;

• President Obama for the budget through 2020 projected only a 2.5% interest rate on the federal debt, whereas the actual interest cost since 1980 has averaged 5.7%. If the 5.7% interest cost was used, the US deficit would increase by another $4.9 trillion by 2020;

• President Obama projects 4.2% growth rate of the economy for the next 3 years. If growth is only 2.5%, deficits would increase by another $4 trillion by 2020;

• The US government borrows 40-50 cents for every dollar it spends. A balanced budget without reducing the existing debt will require cutting government spending in half.

• The current agreement to cut $2 trillion of spending over ten years, in exchange for raising the debt ceiling $2.4 trillion debt ceiling will only fund the Treasury until before the next presidential election.

The Treasury will need to borrow $20 trillion or ten times more than the proposed deficit reduction agreement over the next decade.

The American Social Welfarists promised that government bureaucrats could manage the economy so effectively we would avoid the pain of deleveraging the ludicrous amount of mortgage and credit card debt we ran up in the “good times”. Congress did put Welfare State on steroids, but much of the $5 trillion in deficit spending went to not-so-well-intentioned bailouts and subsidies for powerful cronies. With solvency of our nation now at risk and unemployment rising again, the Privateer suggests another path for our nation:

“Economic “miracles” (so-called) have happened before. The US emerged from a deep recession in 1920-21, because the government and the central bank did NOT interfere. Germany emerged from the actual physical rubble of WW II for exactly the same reason. So, to a lesser extent, did Japan. In all these cases, debts which could not be repaid were not held on life support by central banks, they were written off. In all these cases, creditors took very severe “haircuts” indeed while many debtors literally had to start again from scratch. In all these cases, the LACK of government impediments or government largesse meant that a recovery took place in a much shorter time frame than would otherwise have been the case.

Nothing demonstrates more clearly how the Social Welfare State is on life support than the fact America’s fastest growing cohort of the unemployed are federal, state and local government workers. Last month government cut a record 39,000 jobs; over the past eight months governments have cut a combined 238,000 positions. With federal, state and local governments all threatened with debt defaults and the public angry over failed spending; the American Social Welfare State is doomed! Can you hear that catchy tune from that great American economist Fergie: